Money: Beginner's guide to investing in shares: Banks may lose their shine
The sector is riding high on takeover fever, but for how long, asks Magnus Grimond
Sunday 25 January 1998
If you are one of these, you have probably been bewildered by the varying fortunes of the newly floated societies. Shares in the Halifax and Woolwich have meandered only a little from their launch price, but those ofNorthern Rock and Alliance & Leicester have soared by as much as 50 per cent.
Much of this starkly differing performance is down to takeover fever sweeping the bank sector. The restraint of Halifax shares has been partly due to the feeling that the mortgage giant is too large to be swallowed, while Woolwich is expected to use its statutory five-year protection from takeover bids to fend off unwelcome offers. By contrast, Northern Rock and Alliance & Leicester, each for different reasons, are seen as takeover targets.
But it is very unwise for long-term investors to hold shares solely on the hope that a bidder will pay an outrageous price for them. These shares have already come a long way: those of the Woolwich started their market life at double the level of official estimates just 18 months before, while, as forecasts from City stockbrokers Merrill Lynch show, Northern Rock's now stand on a heady price-earnings (p/e) ratio of 21, a least a fifth higher than the stock market as a whole.
The current glamour of banks reflects a fashionability to which the sector is not accustomed. Ten years ago, bank shares languished on p/e multiples of half those of the rest of the market, while their dividends yielded income as much as 50 per cent above the average. But in the last six years, banks have outperformed other shares by around 150 per cent.
This is mainly due to two real, or "fundamental", changes to the way banks operate. First, many people believe that for the first time in a generation the British economy is being better managed, with a determination to keep inflation low and avoid the boom-and-bust cycle. These economic cycles have always caught out the banks, which have notproved very good at their main business of lending money. The assumption now is that, if businesses and individuals making up the economy operate on a more even keel, bank loans to them should be of better quality than in the past.
The second factor boosting the sector is better management of the banks themselves. The discredited old guard that ran the industry in the 1980s has largely been replaced. Management has been weeding out loss-making lines, even at the expense of a few sacred cows. Barclays and NatWest have dumped much of their expensively created but poorly performing investment banking. Another "core" business scaled back in the face of wafer-thin margins is lending to big companies, which can often borrow from the money markets more cheaply. Costs have been cut relentlessly and surplus funds given back to shareholders as higher dividends or share buy-backs, not pumped into the economy as loans to flaky borrowers.
The arrival last year of the building societies and the general urge to merge have come on top of all this. The former mutuals have had a dramatic effect on the market indices. Over the past year, the weighting of banks in the main FT-SE 100 index has grown by a third: they now represent a fifth of the measure. The fund managers who slavishly follow the index have had to scramble for shares in the former building societies or older banks to maintain their weighting, pushing up share prices.
Can this last? Many analysts are bubbling with enthusiasm on takeover hopes, but these may be overdone. Politics is likely to scupper the much- rumoured merger of Barclays and NatWest, given the huge share of the English market the combined bank would control. Straight takeovers would require heroic assumptions about the UK market's prospects to justify paying current stock market prices.
But predicting takeovers is only for the brave. Bank shares are now generally on a p/e rating at or above the market for the first time in years, while bad debts have fallen to historically low levels. That leaves little room for mistakes if economic conditions become more turbulent. HSBC and Standard Chartered, with big operations in the Far East, have already seen their previous heady ratings cut down to size. With the UK economy set for a downturn in 1998, the sector may prove duller than some wilder spirits imagine.
peopleContenders for Time magazine's Person of the Year are a mixture of the good, the bad and the holy
tvSteven Moffat reveals the actor was dying to take on the role of the Time Lord and says he is excited to see what he will do with the character
sportBayern Munich 2 Manchester City 3: City come from two down to beat reigning European Champions
newsAs the world remembers Mandela the hero, the prison where he spent 27 years seems all the more brutal
arts + ents... and a chance to paint Booker Prize winning author Hilary Mantel
danceUnder Tamara Rojo's inspired direction, it seems possible that it could challenge the dominance of the Royal Ballet. We meet some established names and rising stars
travelDiscover Uruguay's jet-set beach resort, an Atlantic enclave with plenty of art and culture to explore on the side
- 1 It’s shameful that our universities have accepted gender segregation under pressure from the most oppressive religious fanatics
- 2 Sir Ian McKellen hits back at Damian Lewis' 'fruity actor' claims
- 3 Kenyan politician Mike Sonko left red-faced after photoshopping himself next to Nelson Mandela
- 4 Selfie at funeral: Cameron squeezes in on Obama snap at Mandela memorial
- 5 Is Facebook making us forget? Study shows that taking pictures ruin memories
- < Previous
- Next >
iJobs Money & Business
£60000 - £85000 per annum + BONUS + BENEFITS: Harrington Starr: A leading asse...
£45000 - £70000 per annum + Bonus + Benefits: Harrington Starr: Technical Impl...
£65000 - £90000 per annum + Bonus + Benefits: Harrington Starr: Rogue Trading ...
£35000 - £45000 per annum + BONUS + BENEFITS: Harrington Starr: A leading, Cit...
Day In a Page
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.
A six-bedroom detached period property with secluded gardens, ample parking and a double garage in Rye, £675,000.
A large split-level property with three double-bedrooms and roof terrace, close to Crouch End Broadway, £625,000.
A charming barn conversion in the picturesque Cotswold village of Ilmington with three bedrooms, a detached garage, workshop and beautifully manicured gardens £675,000.
A three-bedroom new build, ground-floor flat with two bathrooms, close to Bermondsey tube, £445,000.
A three-bedroom house in an enviable new development moments from Oxshott High Street, with secluded garden and decked area, £385,000